Paul Krugman's analysis of the European Debt Crisis, in this morning's New York Times, should be required reading -- not just for the movers and shakers in Europe, but for our own so called wise men. Krugman's critics on the right accuse him of fiscal hysteria. But his analysis is clear eyed and, therefore, gloomy:
Think of it this way: private demand in the debtor countries has plunged with the end of the debt-financed boom. Meanwhile, public-sector spending is also being sharply reduced by austerity programs. So where are jobs and growth supposed to come from? The answer has to be exports, mainly to other European countries.
But exports can’t boom if creditor countries are also implementing austerity policies, quite possibly pushing Europe as a whole back into recession.
Krugman has never argued that debt is not a problem. But he continues to maintain that it is a longer term problem. What is more important -- in the short term -- is stimulating economic growth, creating jobs, and improving government tax receipts.
For those who believe that debt is about to overwhelm us, all of this is counter intuitive -- just as John Maynard Keynes' solution for The Great Depression was counter intuitive. And, therefore, Krugman's conclusion that, "there is a very wide gap between what the euro needs to survive and what European leaders are willing to do, or even talk about doing" is spot on.
That same conclusion applies to David Cameron's remedy for his country's problems. Cameron was in Ottawa last week, praising Canada for advocating the same policies. Meanwhile, Jim Flaherty has the gall to lecture the Europeans on their lack of fiscal virtue. And Stephen Harper goes on American television, claiming that Canada is a light to the world.
Such incredible and wrongheaded arrogance is more than embarrassing. It's folly -- because our elites cannot see the trees for the forest.
This entry is cross posted at The Moderate Voice.